PBR Overview
Principles-based reserving replaces a single prescribed formula with a reserve computed from the company's own modeled cash flows under prescribed constraints. It is set out in the NAIC Valuation Manual, which became operative January 1, 2017 under Section 11 of the Standard Valuation Law, and it now covers individual life, variable annuities, and non-variable annuities through three frameworks.
1. What changes under PBR
Under formulaic reserving, the reserve is a net premium calculation on a prescribed mortality table, a prescribed interest rate, and, for most products, no lapse assumption. Under PBR, the reserve is the greater of a formulaic floor and modeled reserves projected from the company's anticipated experience with margins, discounted on the company's own assets, and, where the business carries material tail risk, computed across stochastic economic scenarios. The regulation moves from prescribing the answer to prescribing the method, the guardrails, and the documentation.
2. The three frameworks
| VM-20 | VM-21 | VM-22 | |
|---|---|---|---|
| Products | Individual life insurance | Variable annuities and similar guarantees | Non-variable (fixed) annuities: accumulation, payout, longevity reinsurance |
| Applies | Issues on or after the company's PBR start: electable from January 1, 2017, mandatory for issues from January 1, 2020 | All in-force contracts by valuation date from January 1, 2020, with pre-2017 contracts reached through AG 43; elective phase-in | Issues on or after January 1, 2026, with an optional three-year transition; mandatory prospectively from about January 1, 2029 |
| Components | Net premium reserve (NPR), deterministic reserve (DR), stochastic reserve (SR) | Stochastic reserve plus additional standard projection amount; alternative methodology for simple contracts | Deterministic reserve for business passing the single-scenario test, stochastic reserve otherwise; formulaic floors |
| Reserve held | Greatest of NPR, DR, SR within each reserving category | Aggregate reserve, allocated to contracts; cash surrender value floor per scenario | Aggregate reserve by reserving category; cash surrender value floor with market value adjustment |
| Exclusions | Deterministic and stochastic exclusion tests; small-company life PBR exemption | None; alternative methodology for contracts without guaranteed living benefits | Stochastic exclusion test; annuity PBR exemption by premium size |
| Standard projection | None | Additive: the additional standard projection amount on prescribed assumptions | Disclosure only |
3. How a PBR reserve is built
- Formulaic floor. VM-20's net premium reserve is computed policy by policy on prescribed mortality, interest, and lapses. The annuity frameworks use cash surrender value floors instead.
- Assumptions. Each material risk factor gets a prudent estimate: anticipated experience plus a margin in the direction that increases the reserve. Mortality margins are prescribed by credibility; behavior margins are set by sensitivity testing; economic risks are modeled stochastically rather than margined.
- Assets and discounting. Starting assets are the company's actual assets allocated to the business; reinvestment follows the company's strategy subject to a prescribed guardrail; default costs and spreads are prescribed. The deterministic reserve discounts at the net asset earned rate.
- Stochastic reserve. Cash flows are projected across prescribed economic scenarios (the generator of economic scenarios, with the stochastic exclusion ratio test as the gate). The reserve is the conditional tail expectation at the 70th percentile (CTE 70) of the scenario reserves.
- Aggregation. Cash flows may be netted across contracts inside a model segment; the frameworks differ on where offsets may cross product lines.
4. Governance and reporting
VM-G assigns responsibilities to the board, senior management, and the qualified actuary. VM-31 requires a PBR Actuarial Report documenting assumptions, margins, models, and results. VM-50 and VM-51 require experience reporting to the NAIC. The appointed actuary's asset adequacy analysis under VM-30 continues to apply on top of the PBR reserve.
5. Where to go next
Framework Comparison
VM-20, VM-21, and VM-22 compared on 20 dimensions with regulation text, section cites, and PDF pages; downloadable as an Excel table.
Term life under VM-20
The most complete product walkthrough, including the regulation timeline.
Document Library
The Valuation Manual and the documents it cites.
Sources: NAIC Valuation Manual, 2026 edition (VM-20 pp. 45–142, VM-21 pp. 143–226, VM-22 pp. 227–318, VM-G, VM-30, VM-31). Dates for VM-22 mandatory application reflect the manual's transition provisions and are stated approximately.